by William Henderson, Vice President / Head of Investments The markets took a pause last week with a brief pull back, and all three indices posted negative returns.  For the week that ended March 19, 2021, the Dow Jones Industrial Average returned –0.5%, the S&P 500 Index lost –0.8%, and the NASDAQ fell by –0.8%. The minor pull back did not reverse the positive returns across the market on a year-to-date basis. Year-to-date, the Dow Jones Industrial Average has returned +6.6%, the S&P 500 Index +4.2% and the NASDAQ +2.5%. We continue to see the natural divergence occur between growth (technology) and value (industrial) stocks as the economic recovery gets underway. Treasury yields continue to put pressure on the markets as yields are slowly moving higher each week, which is another typical pattern seen as the economy comes out of a recession. Last week the 10-year U.S. Treasury Note moved higher in yield by six basis points to 1.69%. At year-end 2019, prior to the pandemic and during a very strong and growing economy, the 10-year U.S. Treasury Note stood at 1.91%.  As the economy recovers from the “Black Swan Event,” of COVID-19, the markets are simply reverting to their traditional patterns of performance. 

The Federal Reserve concluded its two-day meeting last week and announced a widely expected continuation of its policy to keep interest rates unchanged at zero to 0.25%.  Relative to the December Fed meeting, more committee members expected higher rates by 2023 year-end. Still, the majority anticipate a policy hold through 2023. On the economic front, the Fed upgraded its near-term economic growth and recovery outlook to 6.5% in 2021. The Fed is seeing all the positive headwinds behind an already strengthening and recovering economy and adjusting their estimates higher. As we have written repeatedly, there is $20 trillion of cash in bank deposits, commercial accounts, and money market funds; fiscal and monetary policy are fully behind the economy; and the COVID-19 vaccine is being widely distributed nationwide. A primed consumer is ready to spend! 

A brief glance at the chart below shows the Gross Domestic Product of the United States since 1950 as reported by the Federal Reserve Bank of St. Louis. The pandemic dip in GDP is clear, but so is the recovery. Plus, the Fed is on the low side of GDP estimates for 2021 when compared to most Wall Street economists who are predicting numbers as high at 9-10%.   

Our VNFA Founder and Chairman, Tom Riddle, recently mentioned a market anecdote to me that I thought was interesting: “The stock market is like a Yo-Yo on an escalator, and the media wants you to focus on the Yo-Yo but you should focus on the escalator.” Remember to speak with your financial advisor often so you remain focused on the escalator. 

by William Henderson, Vice President / Head of Investments
The markets posted a strong week with all three major averages gaining last week. For the week that ended March 12, 2021, the Dow Jones Industrial Average returned +4.1%, the S&P 500 Index gained +2.6%, hitting a new record, and the NASDAQ gained +3.1%. With last week’s positive returns included, year-to-date, each index stands well into positive territory. Year-to-date, the Dow Jones Industrial Average has returned +7.1%, the S&P 500 Index +5.0% and the NASDAQ +3.1%. The Dow and S&P 500 continue to diverge from the NASDAQ as value stocks shine a bit more than traditional growth stocks. Higher yields on U.S. Treasury bonds are also impacting growth stocks as they weigh heavily on price/earnings multiples – a gauge of equity valuations. These returns are indicative of a strong recovery as growth stocks, which are best represented by the NASDAQ, initially lead the market out of a recession; and value stocks, represented more closely by the Dow Jones Industrial Average, tend to accelerate once the recovery is well under way. Last week, the 10-year U.S. Treasury Note moved higher in yield by three basis points to 1.63%. 

The latest $1.9 trillion stimulus package is in the books and direct deposits will be hitting consumer bank accounts as early as this week. The Federal Open Markets Committee (FOMC) under the leadership of Fed Chairman Jay Powell, holds it two-day meeting this week but there is no indication that Powell will lift the pedal off the monetary stimulus in the form of zero interest rates. Beyond stimulus, we are seeing the pace of COVID-19 vaccine distribution accelerate. As of last Friday, more than 100 million doses had been administered to Americans. President Biden is committed to May 1 as the date for states to make vaccine shots available to all Americans. It is getting harder for investors to bet against a very strong and sustained economic recovery throughout 2021. The economic recovery is evident in new sectors of the economy. Last week’s market winners included retailers such as Macy’s, L Brands, and Kohl’s, big airlines, and some of America’s stalwart manufacturers, including Boeing, Caterpillar, Ford, and GM. Several economists, including Cornerstone Macro, are predicting 9%-10% GDP growth in the second half of 2021. 

According to the Federal Reserve Bank of St. Louis, the Financial Stress Index has moved well below pandemic levels. This Index is the weekly average of yields, credit spreads, interest rates and other financial indicators. A higher index level suggests severe market disruptions (see chart). The value was close to zero again, thus indicating a return to normal financial market conditions.   

SOURCE: Federal Reserve Bank of St. Louis, St. Louis Fed Financial Stress Index [STLFSI2], retrieved from FRED, Federal Reserve Bank of St. Louis, March 13, 2021.

Everything seems in place for a mid-summer reopening of the economy and herd immunity reached nationwide around the same time. The markets clearly recognize that fact and are looking to continue EPS growth and a solid performance in 2021. Stock market corrections and repricing are common in long bull markets, but they are also indicative of a healthy market.

by William Henderson, Vice President / Head of Investments

Markets ended mixed last week with the broader indices posting slight gains while the tech-heavy NASDAQ posted a loss. For the week that ended March 5, 2021, the Dow Jones Industrial Average returned +1.8% and the S&P 500 Index gained +0.8%, while the NASDAQ fell by -2.1%. Year-to-date, each index remains just in positive territory. Year-to-date, the Dow Jones Industrial Average has returned +3.3%, the S&P 500 Index +2.6% and the NASDAQ +0.4%. These returns are indicative of a strong recovery as growth stocks, which are best represented by the NASDAQ, initially lead the market out of a recession; and value stocks, represented more closely by the Dow Jones Industrial Average, tend to accelerate once the recovery is well under way. 

Treasury bond yields continued to rise last week as the 10-year U.S. Treasury Note moved higher in yield by six basis points to 1.60%. Improving economic data and the imminent passing of the $1.9 trillion stimulus program both contributed to the sell-off in Treasuries. Last week saw a sharp reversal of equities on Friday as the US Bureau of Labor Statistics released a strong jobs number on Thursday. The domestic economy added 379,000 jobs in February, exceeding Bloomberg-surveyed economists’ forecasts for a 200,000 gain. The strong rebound in jobs, even before the economy fully reopens, is showing the full depth and breadth of the economy’s V-recovery. Further, Cornerstone Macro’s economist is predicting job gains in 2021 to average 500k per month and for Real GDP to approach 8-10% this year.

Inflations remains benign even in the face of higher oil prices. The spot price of WTI (West Texas Intermediate Crude) reached $52/barrel last week, a six-month high. This is what happens when you turn off or shrink the U.S. oil production spigot (think Keystone XL Pipeline, fracking and limited further drilling on federal lands.) 

Conversely, solar and wind projects continue to set a rapid pace as the U.S. Energy market slowly but deliberately converts to renewable sources of energy from fossil fuels. Cornerstone Macro expects combined energy output from wind and solar to move from 12% in 2020 to 30% in 2030.   

It is important to remember that a strong economy is always more important than oil prices and the fear of rising interest rates. Fed policy of near zero on short-term rates coupled with continued fiscal stimulus assistance are aiding the strong economic recovery we are seeing in 2021. The strong jobs number we saw last week is just the beginning. As the COVID-19 vaccination reaches more and more people, the travel and leisure sector of the economy is expected to bounce back as consumers are finally offered the opportunity to spend their squirreled away savings.   

by William Henderson, Vice President / Head of Investments
It was a rough week for Wall Street as higher bond yields caused investor concern. U. S. Treasury yields moved to their highest level since January 2020. U.S. Treasury Note closed the week at 1.54%, up 17 basis points from last week. For the week that ended February 26, 2021, the Dow Jones Industrial Average fell by -1.8%, the S&P 500 Index fell -2.5% and the tech-heavy NASDAQ fell by -4.9%. However even considering last weeks loses, all three averages remain in positive territory for the year. Year-to-date, the Dow Jones Industrial Average has returned +1.4%, the S&P 500 Index +1.7% and the NASDAQ +2.5%.

Rising bond yields generally point to an economic recovery, however, a rise in rates also increases corporate and consumer borrowing costs, which when taken alone can undermine the recovery, especially if rate rise too quickly. Last week’s move in the 10-year U.S. Treasury Note to 1.54% was a notable one because its yield now matches the yield on the S&P 500 Index.  This so called “inflection point” often causes a move from risky stocks to risk-free treasuries, where an investor can get the same yield without the gyrations that accompany investments in the stock market. On the other hand, increasing yields and a steepening yield curve (the measure of yields between overnight rates and the 10-year U.S. Treasury) helps banks, insurance companies, and other financial institutions as they now borrow low (based on short-term rates) and lend high (based on long-term rates). Last week, Fed Chair Jay Powell, committed to keeping short-term rates anchored at 0% for as long as needed to assure the economy fully recovers.

Vaccine distribution, production, and the release of an additional vaccine from Johnson & Johnson, are stifling the COVID-19 headwinds and cases worldwide dropped again last week. The Biden Administration is on track to deliver another whopping $1.9 trillion stimulus package as early as this week, while talking up yet another stimulus package shortly thereafter. Fiscal and monetary stimulus is unparalleled in response to the pandemic and we expect it to continue even as we move to a “normally” functioning economy.

We would be remiss if we did not point out the performance of the consumer. The Personal Saving Rate according to the Federal Reserve Bank of St. Louis, stood at 20%, significantly higher than pre-pandemic levels which were closer to 7%.

Further, again as reported by the Federal Reserve Bank of St. Louis on February 26, 2021, Real Personal Consumption Expenditures on Durable Goods reached a record $2.2 billion in January 2021. Durable Goods are represented by longer-lasting items, such as cars and washing machines; and personal consumption drives almost 70% of the U.S. economic output.

When the vaccine gets more widely distributed and herd immunity is reached, the consumer will be released to impact the hardest hit sectors of the economy such as travel and leisure. 

Some Wall Street economists are predicting second half GDP growth estimates well above 6%. Corrections in the markets like we saw last week, are expected and healthy for a well-functioning stock market. The best antidote for market corrections is a long- term outlook and a well-diversified portfolio.  

by William Henderson, Vice President / Head of Investments
For the week that ended February 19, 2021, the Dow Jones Industrial Average returned a nominal +0.2%, barely positive while the two broader indices were both negative for the week with the S&P 500 Index falling –0.3% and the NASDAQ –1.1%. With last week’s mixed results, returns nonetheless remained positive on a year-to-date basis. Year-to-date, the Dow Jones Industrial Average has returned +3.2%, the S&P 500 Index +4.2% and the NASDAQ +7.8%. For the week, the 10-year U.S. Treasury note moved significantly higher by 13 basis points to a post-pandemic 1.29%. 

No one can question, that the economy still is not “normal,” but the markets sure are acting that way. Year-to-date returns, noted above, are decent and certainly point to a positive year overall. Further, last week’s economic releases around industrial production, housing and retails sales were strong. Everything seems to be COVID-19 related. According to Johns Hopkins University, fresh COVID-19 cases for the week ending Feb. 14 were the lowest since October, at 2.7 million, a modest 2.5% increase in total infections from the previous week, the weakest gain since the start of the pandemic and less than half the rate seen a month earlier. Lastly, corporate profits (EPS) announcements continue to beat expectations, credit spreads are narrowing and capital expenditures by corporations are increasing. Soon, we are going to see rebounds in the sectors that were most battered by the virus-related economic shutdown.

Even as Treasury Secretary Yellen calms warnings about inflation, investors are fleeing bonds amid fears that inflation with heat up and return. The rise in the 10-year Treasury to 1.29% last week certainly shows investors are worried about bonds. Yields move opposite direction to prices and rising bond yields can hurt investors. The bigger story here is not bonds but instead the stock market which has multiple tailwinds supporting further positive movements. President Biden’s stimulus package, whether it is $1.4 or $1.9 trillion is going to be huge. Treasury Secretary Yellen and Fed Chair Powell are going to be patient around inflation moves and fully supportive of the administration’s efforts with fiscal stimulus. As mentioned, COVID-19 cases are down, the vaccine is being widely distributed and national herd immunity is expected by mid-summer or sooner.   

Things may not be “normal,” but normal is closer than we think. A common misstep all investors should avoid is trying to time the market, and 2020 showed just how detrimental timing the market could be for investors even in the short term. Stay focused on the long-term objective and realize “normal” is coming back.  

by William Henderson, Vice President / Head of Investments
The markets continued to move into record high territory last week looking past COVID-19 and forward to additional stimulus, greater distribution of vaccines and a long-awaited recovery in employment. As expected, Fed Chair Jerome Powell also stuck with his dovish tone last week reminding us that the Fed has no intention of lifting from the economic accelerator for a long time. For the week ended February12, 2021, the Dow Jones Industrial Average returned +1.0%, the S&P 500 Index +1.2% and the NASDAQ +1.7%. Last week’s returns piled onto an already positive year for the markets. Year-to-date, the Dow Jones Industrial Average has returned +3.0%, the S&P 500 Index +4.9% and the NASDAQ at +9.4%. For the week, the 10-year U.S. Treasury note moved only one basis point higher to 1.16%.   

We have talked about M2, the Money Stock of savings deposits, bank deposits and retail money market fund balances, several times in The Weekly Commentary. The chart above from the Federal Reserve Bank of St. Louis shows M2 sitting at record levels and indicates graphically how much cash is sitting on the sidelines waiting to be released into a post-COVID-19 economy. An additional stimulus package of $1.5 to $1.9 trillion will only add to those reserves. As we reach herd immunity and the magic 75% of the population vaccinated, that cash will be put to work. Sectors like leisure, travel, energy, and retail will see a surge in activity. It will be gradual and the journey back to normal will be bumpy and winding, but it is in sight and the markets are seeing the end game not the path.

I feel like this column often returns to the same thing: a dovish Fed, a willing Treasury Secretary, an able Democratic majority party across the government, and vaccine distribution when coupled with the sidelined cash only points to a very healthy economy in the second half of 2021. Several firms are predicting double-digit GDP prints (10%-11%) in 3Q & 4Q 2021.    Investors should look past the clamor, and instead focus on the end game described above. It is interesting to note that on years when the S&P 500 Index returns greater than 10%, there are between three and five market corrections that year of 5% or more.  Why does that matter? It is a reminder to investors that corrections are normal in healthy markets and part of long-term investing. 

by William Henderson, Vice President / Head of Investments
Investors shrugged off economic setbacks such as a weaker than expected jobs report and pushed stocks higher by the end of the week hitting new records across the board. Additionally, Janet Yellen, the newly installed Treasury Secretary, pushed for rapid fiscal stimulus while ignoring the potential for inflation. Such dovish commentary pushed the 10-year U.S. Treasury note to 1.15% by the end of last week.  For the week that ended February 5, 2021, the Dow Jones Industrial Average returned +3.9%, the S&P 500 Index +4.7% and the NASDAQ +6.0%. The strong returns from last week moved the averages well into positive territory for the year; with the Dow Jones Industrial Average returning +1.9%, S&P 500 Index +3.6% and the NASDAQ at +7.6%. As noted above, the 10-year U.S. Treasury note moved higher by eight basis points to 1.15%.   

With the modest rise in Treasury yields, the yield curve, the slope of which gives an idea of future interest rates and economic activity, is at its steepest since 2017. The steepening yield curve signals comfort by Treasury and Fed that the economy is healing and expectations of upcoming healthy inflation. While making the case for President Biden’s $1.9 trillion economic relief package, Treasury Secretary Yellen noted on CNN February 7 that “too rapid inflation was a risk that needed to be considered and that policy makers have the tools to deal with that should it materialize.” 

Other than the slightly weaker January payroll report of only +49,000 new jobs added, there were plenty of positive economic reports last week. The Institute for Supply Management’s service survey topped expectations and the new-order and hiring components pointed to stronger growth ahead and durable-goods orders topped expectation as well. The economy will get a healthy boost from more stimulus payments, if not from a bipartisan effort than from the Democrats own $1.9 trillion package. The final driving power behind last week’s rally in the markets was improving Covid-19 news. The weekly number of new cases continued to drop and new vaccines, including one from Johnson & Johnson, will be on the scene soon.   

With some much noise from the media, investors oftentimes lose sight of the long-term objective which is saving for retirement or another similar financial goal. In contrast, clear financial goals, a disciplined investment process and a long-term approach is how investors can achieve their objectives. 

by William Henderson, Vice President / Head of Investments
Uncertainty from Washington and continued sloppy and inefficient roll out of the COVID-19 vaccine put pressure on the markets last week and all three major averages posted negative returns for the week. The Dow Jones Industrial Average returned -3.3%, the S&P 500 Index -3.3% and the NASDAQ -3.5%. The returns from last week moved the averages into mixed territory year to date. With the Dow Jones Industrial Average and S&P 500 Index both with negative year-to-date returns at -2.0% and -1.0% respectively, while the NASDAQ remains positive for the year at +1.4%. The 10-year U.S. Treasury note moved down two basis points to close the week at 1.07%.

President Biden’s latest stimulus plan calls for a $1.9 trillion package. The counter-offer stimulus plan from Senate Republicans called for a smaller $600 billion package. Whichever is the outcome, the result is clear, more government stimulus money is on the way to consumers and the economy.    

Economic data released last week was mixed with 4Q real GDP rising only 4.0%, which was less than the 5.5% some economists had predicted. However, capex was a strong +13.5% and housing up a stunning +33.5% for the quarter. Clearly, investment is driving the economy, and everyone is looking ahead to the successful widespread distribution of the COVID-19 vaccine. Last week, Fed Chairman Jay Powell was quoted stating the obvious to the investment community: “the key to growth will be the vaccine rollout.”   

Last week we saw some interesting trading in the markets as retail investors handed the hedge fund community losses in a few widely traded short sells. Tailwinds of consumer reserves, Fed liquidity, further government stimulus, and a successful vaccine from at least four pharmaceutical firms outweigh the economic headwinds. Stay diversified and stick to your long-term financial plan. 

by William Henderson, Vice President / Head of Investments
Last week, the three broader market indices posted positive returns with the growth clearly outperforming value as investors moved to technology and communications related equities. The Dow Jones Industrial Average returned just +0.02%, the S&P 500 Index +1.2%, and the NASDAQ +3.3%. All three indices are now well into positive returns territory for the full year, with the Dow Jones Industrial Average at +1.4%, the S&P 500 Index showing +2.4% and the NASDAQ at a healthy +5.1%. While technology stocks showed strong gains for the week, cyclical sectors like energy, financials and materials declined on the week. Despite strong housing and jobless claims data released last week, the 10-year Treasury yield ended lower on the week at 1.09%.

Goldman Sachs noted “by the end of trading on Friday, January 22, 2021, the S&P 500 had recovered +70% from its March 2020 low.” More importantly, they continued, “history suggests that there is more room to run in the market even after 2020’s strong rally. During past U.S. economic expansions, investors have enjoyed positive one-year returns 87% of the time, and >10% drawdowns only 4% of the time.”  

Adding to history, we have a willing Fed providing liquidity and stability to the markets. It is important to remember the adage: “Don’t fight the Fed.” Further, Jay Powell and this Fed Team are as transparent as any group since the GFC. Every Fed Governor is repeating the “Lower for Longer” plan regarding interest rates and we believe them. Until the economy is safely in growth mode and the impacts of COVID-19 are waning, this Fed will keep the liquidity pump primed and give unlimited backstops to the market to assure stability.

The newly formed Biden Administration has been very clear with their intentions to combat COVID-19 with effective vaccine distribution thereby reversing the economic damage done by the pandemic. However, each U.S. state is going about the vaccination task with its own rules and processes with no real consistency of distribution. This is lending anxiety to consumers and the markets as the process of vaccinating most Americans is still uncertain and confusing. Our key themes remain the same: effective distribution of vaccines, a willing Fed, pent up consumer demand and a strengthening manufacturing sector. All together they equal a strong bullish sentiment for the year. Patience, as always, is a virtue.

by William Henderson, Vice President / Head of Investments
All three broader market indices showed negative returns for the week as portfolio rebalancing reallocating took place. The Dow Jones Industrial Average returned (-.91%), the S&P 500 Index (-1.48%) and the NASDAQ (1.54%). Market average for the full year 2021 remain in positive territory with year-to-date figures at +0.73 for the Dow Jones Industrial Average, +0.39% for the S&P 500 Index and +0.87% for the NASDAQ. Washington was relatively calm, and the markets are looking at a Martin Luther King Jr. holiday shortened week punctuated by the inauguration of President Biden and a peaceful transition of government.

The market will begin a laser-like focus on President Biden and his immediate actions as the new Commander in Chief. Already, President-elect Biden has announced his plans on a flurry of executive orders after his inauguration. Some will roll back Trump administration orders like immigration restrictions and others will be forward actions such as rejoining the Paris climate agreement, a mandate on mask wearing during travel and an extension on the pause on student loan payments. A clear focus on the distribution of the COVID-19 vaccine will remain and attention will be paid to the seemingly slower than expected rollout and distribution of vaccines that has thus far taken place. To be sure, mass vaccination, herd immunity and a roughly 75% vaccination rate is the catalyst the economy needs to continue its recovery. 

President-elect Biden also announced the proposal of an additional $1.9 trillion stimulus package early in 2021. Even with a full Democrat-controlled Congress, another $1.9 trillion on top of December’s $900 billion stimulus may be a bit of a pipe dream for Biden and could have difficulty getting approved. All the fiscal and monetary stimulus aside, experts agree that the key to releasing the $20 trillion of cash in money market funds, savings accounts and commercial bank accounts into the economy remains solely focused on the distribution of the COVID-19 vaccine. Each positive indicator of a rebounding economy; whether it be record December e-commerce sales or strong foot traffic at U.S. ski resorts, runs smack into the pandemic and its needed vaccine. 

The market will continue to take its cues from further government intervention in the form of fiscal stimulus, fourth-quarter and year-end corporate earnings releases and developments and improvements in the distribution of the COVID-19 vaccine. We believe the Biden administration will focus on the vaccine, an additional stimulus package and “green” initiatives that a loosely unified government will be able to get behind and move forward. Patience, diversification and a sound financial plan will be critical in 2021.